John Law de Lauriston was a visionary in the 18th century, by creating banknotes, to replace coins that were too cumbersome and impractical in commercial exchanges, by establishing credits, current accounts, by pushing people to buy shares. The whole world of finance is based on the system of Law , the basics are the same:purchases and resales of shares, speculation, investments, interest, bailout of money:nothing has really changed since …
Law's youth
John Law, fifth child of William Law, was born in Edinburgh in April 1671. His father was a wealthy goldsmith in the city and had just enough time to acquire land and a château, before dying in 1683. The family name then became Law de Lauriston and John inherited the paternal fortune. Gifted in mathematics and endowed with an “elephant” memory, John continued his studies in Edinburgh and then moved to London at the age of 21. A handsome young man who pleases the ladies, he spends the inherited fortune in a short time and lives by gambling:bets and games of chance, using the technique of calculating probabilities.
Sentenced to death following a duel with a young London “dandy” friend of the king, then pardoned, he escaped from prison, took refuge in Sussex , then leaves the mainland. We find him, after many comings and goings, in France, then in Holland and back in Scotland where he begs for his pardon, without success. Meanwhile, he meets Catherine Knowles who will give him two children.
An innovative idea:banknotes
His country is in a very complicated financial situation, he writes a document "on currency and trade" where he proposes a plan to get out of the crisis. Affirming that the prosperity of a country depends on the abundance of its means of payment, he proposes to create a bank issuing promissory notes in exchange for currency deposits. The security for these notes would be the income from the land:the landowner would mortgage his real estate in exchange for a quantity of notes equivalent to twenty times his income. With Scotland having so much land, the project is feasible, with property values not likely to fall as quickly as cash in currency. But the banker Patterson, founder of the Bank of England, followed by the Scottish parliament, refuses Law's plan.
Still wanted by the police with a view to his hanging, he crosses the Channel again, arrives in Paris and there, meets "beautiful" people:Desmarets financial controller at the time , the Prince of Conti, etc… Appreciating France and wanting to settle there, he proposed his idea to save the finances of the kingdom, which were at their lowest. In vain ! He leaves for Italy and shares his ideas with the Duke of Savoy Victor Amédée, but no one dares to embark on the adventure.
In Venice, he studies gambling, accumulates a fortune, as well as paintings. For Law, these works will not depreciate over time. He also learns the different banking techniques, seeing that the Venetians easily part with their currency for paper in order to facilitate trade.
Finding no support in Italy, and back in Holland, he threw himself into games and won big in the Dutch lotteries. Having become rich, he settled permanently in France in 1714, in Place Louis-Le-Grand (now Place Vendôme) and acquired a mansion.
The “Law” system
In 1715, Law again offered his services to the King, noting that France was on the verge of bankruptcy (all the money had been spent on wars and constructions, the precious metal was missing, the State borrowed at rates of 8.33%). He takes Holland as an example, the best financial center of the time, with a Central Bank, a unique place for exchanging coins and banknotes… but Louis XIV dies. Supported by Philippe d'Orléans, who became Regent, he transformed his initial project by creating a royal bank which would issue paper money in exchange for gold and lend the metal received to the State.
The Regent followed him and Law created the first General Bank in May 1716, opening its first offices in June, rue Saint Avoie, in front of which a superb Swiss dressed in green welcomes customers. It will become Banque Royale in December 1718, following the model of Dutch banks, with deposit of change against delivery of banknotes, without taking any profit in the process! Profits are made through foreign exchange and discounting transactions. Despite the success and the increase in the volume of issues, the system remains fragile because the bank lends its gold to the State, and has to deal with possible premature repayments of these banknotes and then a new edict:the banknotes can be used to pay taxes.
In his momentum, Law created the Compagnie d'Occident grouping those of Senegal, China and the East Indies, obtaining the monopoly of trade with Louisiana for 25 years. For the first time in France, it is the appearance of negotiable bearer securities. In 1719, he transformed this Compagnie d’Occident into the Compagnie Perpétuelle des Indes, after having bought the Compagnie du Mississipi from the financier Crozat. The new Company receives the monopoly of coinage in France, a concession for nine years.
From this moment on, everything goes at a pace where bankruptcy is inevitable:the Company negotiates, on behalf of the kingdom, the rents for which it is indebted and lends the 1.2 billion pounds needed for this buyout operation, all in banknotes. Subscriptions are well received, new banknotes have a value greater than money:the beginning of inflation. Speculators are so numerous that the price of shares is soaring... Rue Quincampoix is bustling, in all the little corners people are exchanging notes, shares, it is the kingdom of speculators. But the revenues from the Mississippi gold mines do not yet exist. Distraught, investors sell their shares and get paid back in cash. The £500 face value stock then trades at £3,000 in October, then at £10,000 at the end of December!!!
In December 1719, Law took steps to avert catastrophe, announcing a devaluation, then granting a 5% premium in favor of notes and limiting the quantity of change authorized for payments (600 pounds). But at the end of the year, the price of Compagnie des Indes shares fell.
In an attempt to restore the situation, Law was appointed Comptroller General of Finance, then Superintendent General of Finance and bought back some of his own shares to stem the fall. He closed the Compagnie des Indes purchasing office and in February the Compagnie des Indes absorbed the Banque Générale, thus making it possible to recover 100,000 shares belonging to the king. But Law's enemies (the Duke of Bourbon, the Prince of Conti, private financiers) push for speculation and bullishness to collapse the system. The shares increase to 20,000 pounds! Faced with this, Law fixed the value of the shares at 9,000 pounds at the beginning of March 1720, announced a reorganization of the currencies to buy the shares, ordered the coins to be brought to the Mint, prohibited the transport of gold and money, introduces a tax reduction for those who pay taxes in notes, prohibits having more than 500 pounds in cash at home.
The crash of 1720 and Law's bankruptcy
At the end of March 1720, the system began to go bankrupt. The Grands (Prince de Conti and Duc de Bourbon) come in person to collect their money (25 million for one, 14 million for the other), the shareholders come en masse to exchange the notes for cash that the bank does not and to convert them into jewelry, precious stones and real estate; no one has confidence anymore, France and Europe are in the midst of a crisis, riots take place, valets and trusted men of the Great are killed.
In May Law reduced the value of the shares to 5,000 pounds and the notes by half. At the end of May, writings circulate, traders close their shops, the population revolts. We have to react, the Regent finds himself alone and neglected...he has Law fired and plans to "imprison" him. Appreciated by d'Argenson, Law was only arrested in his hotel. During this time, a commission is responsible for verifying the accounts of the bank, no fraud is found, only an excessive issue of note is discovered:the Regent will issue edicts with retroactive effect to cover Law. Law was released three days later, promoted to Superintendent of Commerce of France, General Manager of the Royal Bank and the Compagnie des Indes, and resumed his place on the Regency Council.
He had a lot to do during the last six months of the year:in June he ousted several senior members of finance and politics (Voyer d'Argenson father and son, the provost of the merchants, the Pâris financiers of Dauphiné) and brought Daguesseau back to his side; he burns a large quantity of old notes, prints new notes in limited quantities and orders a new issue of coins; in July, he set up a plan intended to absorb 2,200 million banknotes by creating annuities and establishing current accounts. Despite everything, the people panicked and on July 17, 1720, there were at least 8 dead during a new riot around the Royal Palace and rue Vivienne; the revolting parliament was exiled to Pontoise on the 20th, the army posted itself on the outskirts of Paris, the musketeers crisscrossed the streets. The order is given to the bank not to convert any more banknotes and an ordinance prohibits any gathering of people on the public highway. The songs are circulating:
“Francis, you miss bravery
You are full of blindness,
Hang Law with the Regent
And seize the Bank
It's a matter of a moment"
The situation becomes very tense, the Regent no longer leaves the Tuileries for fear of a plot against the young Louis XV. Clashes took place in many French provinces:the peasants stored the grain, the merchants refused to sell... In August, he carried out a leveling of the species compared to the banknotes, abolished the tax advantages granted to the banknotes; in September, the business of the Compagnie des Indes is good. It absorbs the Compagnie de Saint Domingue and receives the monopoly of the slave trade; in October, the use of banknotes is different:they are withdrawn from circulation and the new cash to be received is payable one-third in banknotes only. Law proposes to the holders of shares to convert them into current accounts of the Bank, but reduced by ¾ of the value. Unfortunately, the effect is not the one sought:the exchange of shares for banknotes increases considerably, the bank no longer has any. At the end of October, Law lost control of financial decisions:he could no longer provide the Public Treasury with the necessary funds, having no more banknotes or coins, and in December 1720, he resigned. Law left Paris on the 14th, France on the 22nd to settle in Brussels.
The Law system is liquidated by the Pâris brothers:the traditional finance system is restored, a judgment of October 28 obliges the holders of shares to come and have them "stamped", those judged "in good faith" receive the money within eight days, the others within three years. About 3,000,000 people, or 15% of the population are affected by this liquidation! Many, however, do not make themselves known...Last point of the liquidation:to sanction the speculators, those who speculated strongly:180 names are listed, some must pay a tax ranging from 60,000 to 7 million pounds! The Compagnie des Indes, reorganized in 1722, disappeared in 1769.
Law's system, too innovative?
France and the people were not ready for these new currencies, these credits, these bearer securities, this stock market speculation; everything was too new, too fast. Rentiers and lenders were ruined, religious congregations with no more patrimony were dissolved. But thanks to Law's system, the Regent partially cleaned up the finances compared to 1715 and was able to resume the war in Spain. Constructions were born, new buildings, work is in abundance, certain layers of the population become rich, there were great transfers of property and real estate, the countryside became flourishing:more breeding and crops.
While the experiment made it possible to reduce the public debt and indeed favored the development of trade, it had significant repercussions on the French economy. Public opinion rejected paper money for a long time, which delayed the progress of the banking system.
After many drinkings and setbacks, extradited, no longer having a protector after the death of the Regent in 1723, finding himself alone, abandoned, disparaged, threatened with death, without resources, he fled to Venice and lived there on expedients (game tables, etc.). He died in March 1729 of pneumonia, having caught cold on the banks of the Rialto.
Bibliography
- Arnaud Orain:The Politics of the Marvelous:Another History of the System of Law (1695-1795), fayard, 2018.
- Edgar Faure, The Bankruptcy of Law (July 17, 1720), Gallimard, 1978.